Early
start to planning to ensure financial security
With goal-oriented
investments, Khandelwal is slated to achieve all his objectives comfortably.
Irrespective of the state
of real estate market and personal financial condi tions, buying a house
continues to be top priority for most Indians. While the emotional security
associated with owning a house is undeniable, it should be considered only if it
does not impinge on other goals or if one's financial status allows it. For
Deepak Khandelwal, this is a primary goal and one he does not want to
compromise on. “I will get some help from my family and, considering my current
income, I want to go ahead with the decision to purchase it,“ he says.
Fortunately, he has started with his financial planning at an early stage and
it may be possible to achieve this goal without affecting his other objectives.
Financial planner Pankaaj Maalde explains how he can formulate a blueprint for
his finances.
Existing financial status
Khandelwal is only 24 and
is working as a software engineer in Mumbai. He is not yet married and his
parents are not financially dependent on him. He brings home a monthly income
of `45,000 and spends `9,000 on household needs. His house rent takes up
another `3,000 and insurance premium is `3,186 a month. He invests `3,000 in
the PPF, which leaves him with a monthly surplus of `26,814.
His important goals include
building a contingency corpus, saving for his wedding, buying a house and
building a retirement kitty. He also wants to save for his future child's goals
and take a vacation, but will consider these later since he has a lot of time
to plan and save for them.
Khandelwal's net worth is
negligible at `1.1 lakh and his slim portfolio comprises only debt in the form
of cash, PPF and EPF corpuses. He should definitely consider equity exposure as
he saves for his goals and the rise in income over the years will boost his net
worth. For now, Maalde will consider his insurance portfolio and suggest
changes, before preparing a plan that Khandelwal can follow.
Insurance portfolio
Expectedly, Khandelwal has
not been very active on the insurance front. The only cover he has bought is a
traditional plan that insures him for `6 lakh and for which he pays an annual
premium of `38,000.Maalde suggests that he continue with the plan as a debt
component of his portfolio since the returns are likely to beat
inflation.However, he is advised not to mix insurance with investment in
future. Khandelwal should also buy an online term plan worth `50 lakh, and this
will cost him `6,000 a year in premium.
As for health insurance, he
is covered by his employer for `3 lakh. However, Maalde suggests he buy an
independent insurance plan worth `5 lakh, which will cost him `10,000 a year.
He is also advised to pick up critical illness and accident disability plans
worth `25 lakh each, which will also cost him `10,000 a year.
Road map for the future
Now, Khandelwal can start
planning for his life's goals, the first of which is having an emergency fund
in place. He can have a corpus that is equal to three months' expenses and it
will amount to `52,500. For this, he can allocate his cash holding of `50,000
and put it in an ultra short-term fund. He can raise the corpus with an
increase in his income.
Khandelwal is also planning
to get mar ried in another 1.5-2 years, for which he wants to save `1.5 lakh.
He can accumulate this amount by starting an SIP of `7,000 in an arbitrage mutual
fund. This will ensure the safety of his capital since the time frame for this
goal is very short.
After his wedding,
Khandelwal wants to purchase a house worth `40 lakh. Considering inflation, the
house will cost `53.25 lakh in three years and Khandelwal wants to furnish 25%
of this amount as down payment. To amass `13.25 lakh as down payment, he will
have to start an SIP of `20,000 a month in an equity income fund for two years
and can shift the amount to an arbitrage fund in the third year. For the remaining
amount of `40 lakh, he will need to take a loan for 25 years, which will result
in an EMI of `35,000 at an interest rate of 9.5%. This amount can be furnished
from the investible surplus and rise in income in three years.
Finally, Khandelwal will need
to save `5.7 crore for his retirement in 36 years. For this, Maalde has
allocated his EPF and PPF corpuses, as well as the maturity amount of the
traditional insurance plan, which will amount to `2.39 crore. For the
shortfall, he should continue to deposit `500 in the PPF every month and start
an SIP of `3,500 in an equity diversified fund. Since he doesn't have the
required surplus, he will have to start this once his income rises.
